Well quite a lot really. Gulf of Mexico ring any bells? Like Chernobyl and Bhopal before, major industrial accidents can have long-term, catastrophic consequences, as well as immediate costs measured in human and economic cost. Offshore drilling carries huge risk and major negative downstream effects if it goes wrong. Onshore mining, on the other hand, is supposed to be plain vanilla these days. Apparently it’s a little like rolling up a cricket wicket and re-laying it when you’ve dug out a bit of sub-soil.

It’s safe, clean and you end up with an environment, which is as good as, if not better, than before. I was told that by the Assistant Head of Global HSE at Rio Tinto back in 2000. Actually it made sense to me…if you contain all the possible polluting effects, run a safe operation and remediate to very high standards…that could work. Perhaps that culture hasn’t quite made to to NZ. Judging by the poor practices at Pike River, one would have to ask serious questions about the management of mining in NZ. This has been reinforced by the recent shutdown of the Solid Energy mine at Spring Creek.

So I’m waiting to be convinced about this new world of clean coal and safe extractive practices. However, whilst I’m waiting, I’d like to suggest another way forward. Given that we do need certain commodities to be extracted, we need to create a risk structure that allows for exploration but with a precautionary approach. In other words, extractors must pay their way and do so in a manner that reflects the worst case scenario, such as the BP Gulf of Mexico disaster. So far BP have set aside a $20b fund for settling claims, of which $7.8b has been currently allocated. It’s an extreme event but an example of how badly things can go wrong when operating in sub-optimal conditions.

It’s time to explore environmental contingency bonds, as a way of mitigating risk and ensuring that insurance is in place before the extracting activity takes place. Just as someone renting a house has to pay a bond up front, to ensure any potential damage is covered, so do extractors have to pay an upfront amount before they start work. This upfront risk adjusted payment would be used to purchase government bonds (supposedly risk free!) or similar risk free asset, for the duration of the extractive activity. If, at the end of the activity period, there are no adverse effects, over and above what may have already been applied for, then the money is returned (plus any interest) to the extractor.

There are several consequences to this approach:

- This may increase the cost of extraction (though, in reality, this is simply a financing cost, assuming no damage occurs).

- This may spur companies towards better risk management and remediation processes. If they get it wrong, they pay. The onus of responsibility falls on the extractor and not the taxpayer and/or local community.

- In some cases, the sum demanded by the rental agent (usually the government) will be too high for the extractor to bear and this may result in the proposed project not proceeding. This isn’t necessarily a bad thing, as the priced risk is considered to be too high. An example of this may be drilling for oil in the Arctic or the new trade of the day, fracking.

How will the bond be priced? Each industry will have a different risk factor, which will be based on previous data….for example, offshore oil drilling and onshore coal mining have very different risk profiles. It’s important to note that this is not an insurance payment but a full cash upfront payment. The extractor may, of course, wish to insure their own risk on having to forfeit the bond but the important point here is that the government holds the cash and can move into remediation action as soon as any damage occurs. As we have seen with numerous disasters, insurers and re-insurers are difficult to deal with and can lock up claims for many years.

Remediating and risk management plans are great but for business, paying cash up front against possible mishaps will certainly concentrate their focus on doing the job properly and without harm. The public will be happier knowing that extractors are having to pay upfront and that they will, therefore, do their utmost to ensure their activities are not polluting, harmful or dangerous. Governments will be happy knowing that they have the cash in the bank, just in case anything does happen. The extractors? Well they probably won’t be happy at the extra cost but according to them they will leave the place in a better condition than they found it. So really they have nothing to worry about at all.

Economics is quite popular these days. It’s not so much the traditional discipline, itself, that is the focus, but a constant flagellation of its representation. Simply put, it’s not delivering the goods. Many trained economists would argue that economics is not the problem but the solution. To paraphrase “it’s the politicians, stupid!”.

The word “economics” also seem to be creeping into the title of every other book, blog or column. “The Economics of…….sex, drugs, football, hairdressing (i made that one up) and so on. The message is clear. People want to know how the world works and seek to understand it through the lens of economics, which is, as I’m repeatedly informed, only about the allocation of resources. We’ve also had Freakonomics followed up by SuperFreakonomics, just in case you didn’t get it the first time.

Diane Coyle is a serial offender is this area with 2 recent books called “Sex, Drugs and Economics” and “The Economics of Enough” (I would recommend both and happy to lend them to anyone local). These books do help us to make more sense of the way our economy works and, therefore, how our society is structured. Economics describes how people transact with each other and for what reasons. Getting into the nitty gritty of personal life seems an odd place for economics to be but research continues to show that how we make decisions is very much dependent on variables which can, to some extent, be measured and quantified. Put bluntly, incentives and pay offs do matter (unless you have no impulse control at all – read male teenagers – but this can be controlled and measured as well).

“The Economics of Enough” is a well written account of  the economic challenges facing us and how we can move forward to create more even prosperity and happiness. Diane outlines what is importance to people: happiness, nature, posterity, fairness and trust. She then looks at where the problems are: our measurement system, our values and our institutions. She then finishes off with a “Manifesto of Enough”, a ten point programme for shifting to a world of “Enough”. It’s all very useful and accurate in its conception. What I like about the book is the realisation that our values have become warped (seen readily in the fiasco of the Global Financial Crisis and its response) and our institutions have become corrupted by those same values. Changing that will require some serious reform and will face major resistance by the vested interests happy with the current situation.

Slipping nicely alongside this book is a new film called “The Economics of Happiness“, which I screened last night in Christchurch to an audience of 115 people, including 2 local MPs. This film, by Helena Norberg-Hodge, Steven Gorelick and John Page, visits themes raised by Diane in her book, but it does so in a more poetic fashion. Drawing on many years research and living in Ladakh, Helena pulls together a picture of a severely fractured global population struggling to maintain its humanity in the face of the onslaught of globalisation. The film dismantles many myths around the benefits of globalisation, describing it is ultimately a process designed for major transnational corporations to increase profits at the expense of people and planet. It’s naturally tends towards the polemical but it’s hard to dispute the evidence. Median incomes do not tell us the whole story. The constant externalisation of environmental and social costs produce a massive hidden subsidy to the global business network. The global institutions (IMF, WTO and World Bank) support and embed this process and remove sovereignty wherever possible so that business faces no impediment. We don’t pay the true costs but some one else picks up the tab.

This links back to Diane’s discussion around measurement. Economics can only be of use if the variables, that are plugged into the models, have integrity. As both Diane and Helena note, the value of integrity is missing. The pressure of profit takes few prisoners and if a cost can be ignored, it will be. Whilst Diane is still in favour of economic growth, she recognises it must come within a properly constructed framework. Helena goes further in promoting a more localized world, where we are in touch with, and close to, our processes and means of production. This approach brings the connection back into our lives and this, ultimately, is the root of the happiness we are looking for.

The clear message from these works (and others like it) is clear. There is a desire for a new approach to our economy and there is evidence to support it. The various manifestos, blueprints and proposals for reform are starting to merge in content and structure. Slowly but surely a solid platform for re-envisaging our society is coming together and a renaissance in economics may not be far away.

Now he is taking his personal brand of straight talking to the heart of America’s chronic food related problem, Huntington, West Virginia. This five county metropolitan area was designated as the unhealthiest city in the nation. Nearly half the adults in the area are obese with heart and diabetes problems running alongside.

It’s tough love all the way from the Essex Crusader who keeps giving us the harsh cold truth: crap in, crap out.

Maybe we need him down here in NZ….

Simply put the developing or poorer nations have got pressing issues of poverty to deal with and they simply don’t see why they should have to pay for the ecological sins of the developed and richer nations, never mind the fact that they got rich on the back of an imperialist framework!

It just seems that no deal can ever be done without some form of equity payback. There has been some suggestion that revenue raised from either carbon taxes or auctioning of permits could be rebated on a per capita basis. This is simply redistributing the costs in a progressive manner and makes sense on the face of it.

However, can’t see the wealthy punters in the West going for that. What to do?

Maybe it’s time to look for the simplest solution and just get a carbon tax on the books. It’s quick and simple as you only need to tax, at source, basic fossil fuels: oil, gas and coal.

This is something i posted about in 2007 but it’s time to take another look.

Let’s say we have established a price for “carbon”,this being a proxy for externalities caused in the combustion of fossil fuels. The most efficient way to alert the market to this cost is to price it in at source ie where the fossil fuel is sold wholesale. This would be the global oil, gas or coal exchanges.

In my paper, Climate Control, i argued for the establishment of a World Energy Agency, where all fossil fuels were sold through. Simply add on the price of carbon and leave it at that. As a one point global process it would be very simple and then that price information would flow out across the world. End of story.

But there are two issues here:

One is that we are trying to stop carbon quantities breaching certain levels. The price elasticity of fossil fuel consumption may hinder this somewhat as consumers of oil products are slow to change demand in response to price. But there is no doubt that the price rises over the last few years certainly caused some pain in the wallet and made people think about ways of cutting back on petrol usage.

The second issue is interesting. What happens to that money? Who does it belong to? As a charge being levied by the WEA it has no soveriegn recipient. So i propose this “charge” goes into a Global Environmental Contingency Fund (GECF). I want to make clear this is not a tax, it is a cost. It is therefore directly related to an expense which is in this case the use or environmental services.

Let’s stop using the word tax. It’s incorrect and draws attention from the fact that we are simply paying for a service we are using.

So how could the GECF work? I have to give that some more thought but the rough idea is that it would hold those funds in bonds (sovereign) or could lend them out at low interest to fund projects that have a positive environmental benefit. This is the tricky bit. But let’s sit with the first piece. The money comes in and sits in bonds. That’s it. So it’s not being spent on projects of a dubious outcome. As the title implies its a Contingency Fund. We don’t know for sure what will happen in the future. The money can be repaid if required by discounting the price of fossil fuels if it turns out that the cost has turned out to be lower.

What could New Zealand do right now?

Implement a tax and use that revenue to reforest the whole country. This can link into a global emissions trading scheme at some point but the important point is to make sure that the tax collected does not go into the general pot.

People need to see the flow of money from them into pure offsetting activities. If we don’t restrict supply (the only accurate and long lasting solution) then we have to slowly change behaviour and do it in the most straightforward way. A ring fenced and targeted tax is probably the best option we have right now given the likelihood of any global agreement at Copenhagen.

They also have the money to do it.

As Yves notes the sums involved are getting to the point where a trillion doesn’t raise eyebrows. The Fed’s balance sheet is expanding quicker than a fast food muncher’s waistline. $2trln or will it be 3? Who knows? Who cares anymore? It’s like the end of a Monopoly game where the deals come thick and fast and the rent for landing on Mayfair (or Park Avenue) breaks your bank.

At the same time one continues to hear, in the background, that ecosystem stress is alive and well. As I noted last week there are some major concerns about the level of ecological debt. In a report by the WWF, called The Living Planet, they estimate some $4-5trln worth of ecological damage is occuring on an annual basis.

Deflation, stagflation, hyperinflation, ecological breakdown and over population.

Your cash losing its value every day as the printing presses run wild.

Time for a pause and a lie down.

It’s just reflected in different ways.

Peak Oil is still a major problem and that is bearing down on us more quickly than we would probably care to know.

The monetisation of ecological damage has been estimated at around $3trln, plenty more than current losses in financial markets (though maybe not when the final bill comes in). It would come as no surprise that the two are interconnected. Consumption drives production and production requires ecological resources. When many ecological costs are externalised then we have a problem.

Who pays the bill in the end? Just as we are seeing who pays the bill for excess consumption of financial resources.

The answer: We all pay.

Forget about the behaviour of small firms or the slope of the IS/LM curve. Think about why people get out of bed in the morning, pay silly prices for a cup of coffee and can’t build a business on Cameroon. Think about how China has grown so fast. How did it happen? Why?

I was lucky enough to attend a lunch last Friday in Wellington (thanks Jim for the head’s up) and hear Tim talk about his new book “The Logic of Life”. I’m looking forward to reading it. It crosses back and forth across the social science spectrum which i believe is incredibly important for an economist to do.

It’s not just about numbers and graphs. As Tim says, it’s about people and the things they do, resources they use and how and why they do it. When I studied economics (University of Manchester 1987!) we lived in a faculty of social science with the option to major in one of 11 different topics as diverse as social anthropology to accounting and finance. These days you’re likely to find economics buried in the commerce faculty.

This approach has failed the student as it presents economics as being about business and numbers. It isn’t at all. Those are merely outcomes and outputs. How people allocate scare resources is a combination of anthropology, psychology, politics, finance, geography , history and so on.

The silo approach that many universities have taken goes counter to the understanding we have developed of systems and the extra efficiencies that coherence or consilience brings.

Economists like Tim Harford will bring new interest to this critical subject and hopefully widen the lens that it is viewed through. After all any economist who can discuss the market for blow jobs with a straight face has to be on to something

Now following the campaign against battery chickens The Independent reports an complete sell out of free range chickens in the UK.

Figures suggest that in 2007 the sale of battery farmed chickens fell by alomst 10 million birds whilst consumers bought 4.4 million more free range.

This is the consumer voting with their wallets and this is how it should be: a change in individual consciousness.

It’s also interesting the overall sales fell by nearly 5% suggesting that some consumers turned away from chicken altogether.  Again this is an outcome of raised awareness.

It just demonstrates what can be done when the consumer shifts.  

So it’s refreshing to see a piece in The Press  on the need for a water market to be constructed to provide an efficient allocation of this precious resource. As I’ve discussed many times, a resource with no price will be treated as if it is free. For many people water is free and always has been but now there are competing claims on water. In New Zealand this is primarily from agriculture with huge demands for irrigation from the dairy industry, which converts water into milk on an enormous scale.

Initial objections are alway around the issue that water is a necessity for life and should therefore be free.  Well so is food and shelter and they aren’t. We have lived with the false notion that water will always be plentiful and is a constant renewable resource. Tell that to Australian farmers who have suffered a 5 year drought in many areas. Water availability is subject to climatic variation and to overuse. Just look at the state of NZ rivers and lakes which are well known to have experienced a serious decline in quality over the last 20 years of intensive farming.

It’s fairly simple to make sure people are allocated a fair supply of free water to assuage those who believe they shouldn’t pay for it but anything above a basic amount should be paid for just like our energy.

It’s only through the pain of payment that we really focus our efforts on conservation, efficiency and alternatives.

It’s time we got on with this whilst we still have water to charge for.

The Greens have come out with a story about a buried chapter in this report. They claim that Chapter 13 was pulled due to a very negative slant on the dairy industry. It pointed to dairy as the “largest cause of environmental decline” in New Zealand. Anyone who likes to swim in their local stream, river or lake could attest to that.

The dairy industry is also one of the biggest earners for the country. There you have it. New Zealand is no more immune to political lobbying than any other country except its pretty transparent. It’s hard to keep anything a secret here.

The Greens propose that this report come under the auspices of the Parliamentary Commissioner of the Environment rather than the government.

Yes to that!  The government simply cannot be trusted to be objective. Yes it’s a sad statement to make but that’s the way it is until we get a more distributed form of democracy and power.

If you can’t sleep then here is the link to the various reports.